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2 FTSE 100 stocks with dividend yields of 10% and 7.5%!

A young black man makes the symbol of a peace sign with two fingers
A young black man makes the symbol of a peace sign with two fingers

In June/July, my wife and I built a portfolio of 10 new shares, consisting of six FTSE 100 stocks, three FTSE 250 shares, and one US stock. We bought these for their high cash dividends, to boost our family portfolio’s passive income.

Among the income stocks we bought are the two high-yielding shares below. Although these two FTSE 100 firms are very different businesses, both pay generous cash dividends to shareholders.

FTSE 100 stock #1: Legal & General

Legal & General Group (LSE: LGEN) is one of my favourite firms. While working in the financial sector for 15 years, I grew to admire this business. Founded in 1836, L&G is now a leading provider of life assurance, savings, and investments.

However, from 15 August to 12 October, the L&G share price plunged, tumbling 28.2%. This fall was triggered by falling share prices, but was worsened by collapsing UK government bond prices during the brief Truss government.

Today, L&G manages over £1.4trn for 10m customers. This makes it a powerhouse in UK asset management, worth £14.8bn. However, its shares have slumped since the summer and stand at 248.8p. At their 52-week high on 12 January, they touched 309.9p. L&G stock is down 15.3% over the past 12 months and 7.6% over the last half-decade.

I like L&G’s business model and its management, yet this FTSE 100 stock looks cheap to me, based on current fundamentals. Its price-to-earnings ratio of 7.3 translates into an earnings yield of 13.7%. Furthermore, the dividend yield of 7.5% a year is covered 1.8 times by earnings. To me, this indicates a solid cash yield with room to grow. Hence, my wife bought this share earlier this year to hold for long-term income.

FTSE 100 share #2: Rio Tinto

The second large-cap dividend stock we own is another FTSE 100 powerhouse. It is Anglo-Australian mega-miner Rio Tinto (LSE: RIO) (Spanish for ‘red river’). Rio Tinto is a world-leading supplier of base metals, including aluminium, copper, iron ore, and zinc.

As the world transitions to a low-carbon future, base metals (especially copper) will be in demand. Yet as a ‘dirty’ business (digging up and selling commodities across the globe) Rio Tinto is not well-favoured among ‘green’ investors.

Rio Tinto’s share price was hit recently, partly due to lengthy lockdowns in major Chinese cities. And when China (the ‘world’s workshop’) slows down, Rio’s earnings can follow. At their current price of 5,263p, Rio shares are more than £10 below their 52-week high of 6,343p touched on 3 March. This values this business at £86.7bn, making it a FTSE 100 behemoth.

Right now, I view Rio Tinto shares as undervalued on fundamentals. Trading on a price-to-earnings ratio below 5.8, they offer an earnings yield of 17.4%. This means that Rio’s dividend yield of 10.0% a year is covered over 1.7 times by earnings. That looks like a comfortable margin of safety to me, which is why we bought this FTSE 100 stock.

Finally, soaring inflation, sky-high energy bills, and rising interest rates are hammering the global economy right now. Indeed, I fully expect a prolonged recession in 2023 to hit corporate earnings, including those of L&G and Rio Tinto. However, we aim to hold our high-yielding shares for 10 years or more. So we will ride out the volatility and wait for recovery!

The post 2 FTSE 100 stocks with dividend yields of 10% and 7.5%! appeared first on The Motley Fool UK.

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Cliffdarcy has an economic interest in Legal & General and Rio Tinto shares. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022